One of the most talked-about parts of the Tax Cuts and Jobs Act is the QBI deduction or qualified business income deduction. So what exactly is it, and can I get it?
What is the QBI?
The qualified business income deduction is a 20% deduction on most income from pass-through entities such as partnerships, S corporations, sole proprietorships and LLCs not treated as C corporations. Pass-through entities don’t pay income taxes at the corporate level. Instead, income is allocated among the owners and taxes are only levied individually.
Do I have to itemize?
No. The QBI deduction is not an itemized deduction.
I’m a doctor. Can I take it?
Yes and no.
Certain professionals, including doctors, lawyers, accountants and other service-related businesses, can only take the deduction if their taxable income is under the threshold amount.
What are those threshold amounts?
The deduction starts to phase out at $157,000 for all taxpayers except joint filers, whose deductions start to phase out at a taxable income of $315,000. This is the amount after you take the standard or itemized deduction.
Are there other limits?
Yes. The deduction can’t reduce your taxable income below zero.
Can I just form an LLC to receive my paycheck?
No. Employee compensation is excluded, as are guaranteed payments to a partner or member of an LLC.
I need more information. What can I do?
Come talk to me about how to best use this new deduction. You can significantly reduce your tax with proper planning.